Termination Charges Research Articles

Mobile Call Termination

We analyse charges levied by mobile telephone networks to deliver calls. We integrate two literatures: one analysing calls from the fixed network, where predicted unregulated termination charges are too high, and one analysing calls from rival mobile networks, where predicted charges are too low. In practice, however, networks adopt uniform charges for terminating both kinds of traffic, a s do regulators. We show how incorporating wholesale arbitrage and demand-side substitution helps reconcile theory with practice. In our framework, the unregulated charge is uniform and typically lies between the efficient and monopoly benchmarks. The re remains a rationale for regulation, albeit reduced.

Asymmetric Termination Charges to Support Small Networks

Termination charges toward newer entrants are often set asymmetrically to exceed efficient costs for telephony traffic. Such practices are said to be beneficial to consumers as well as providing competition a “leg-up”. However claims of consumer benefit are dubious at best, while infant industry arguments are no more likely to apply to telecommunications than they apply anywhere else. Appropriate forms of termination regulation are then considered.

Mobile Termination and Mobile Penetration

In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.

Mobile phone termination charges with asymmetric regulation

We model competition between two unregulated mobile phone companies with price-elastic demand and less than full market coverage. We also assume that there is a regulated full-coverage fixed network. In order to induce stronger competition, mobile companies could have an incentive to raise their reciprocal mobile-to-mobile access charges above the marginal costs of termination. Stronger competition leads to an increase of the mobiles’ market shares, with the advantage that (genuine) network effects are strengthened. Therefore, ‘collusion’ may well be in line with social welfare.

A Retail Benchmarking Approach to Efficient Two-Way Access Pricing: Termination-Based Price Discrimination with Elastic Subscription Demand

We study how access pricing affects network competition when consumers' subscription demand is elastic and networks compete with non-linear prices and can use termination-based price discrimination. In the case of a fixed per minute termination charge, our model generalizes the results of Gans and King (2001), Dessein (2003) and Calzada and Valletti (2008). We show that a reduction of the termination charge below cost has two opposing effects: it softens competition and it helps to internalize network externalities. The former reduces consumer surplus while the latter increases it. Firms always prefer termination charge below cost, either to soften competition or to internalize the network effect. The regulator will favor termination below cost only when this boosts market penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase subscription without distorting call volumes. Furthermore, we show that an informed regulator can even implement the first-best outcome by using this approach.

Cost Based Termination Access Charges in Mobile Sector: Some Considerations

Mobile telecommunications is nowadays one of the most successful technological fields nowadays. Since its introduction in the global market in the last decade of the previous century, it became a very important contributor to the Gross Domestic Product (GDP) of developed and developing countries. In this market, a large number of powerful international telecommunications companies, often in harsh competition among them, are making huge investments, with the aim of achieving large revenues accordingly. The search for profit maximization and the legacy position of the former state-owned monopolistic companies may generate conflicts and unfair practices (e.g. abuse of monopolistic power, anticompetition strategies etc.). The National Regulatory Authorities (NRA) of the different countries have to arbitrate and establish market rules through regulatory processes. In this paper, the foundations of telecommunications regulation are reviewed, and the evolution of mobile call termination charges is studied for three countries with very different socioeconomic and politic situations. The Long Run Incremental Cost (LRIC) approach emerges as the method of choice to evaluate costs and appears to lead to quite similar results as markets enter the maturity stage.

M2M Call Termination – Regulation or Competition?

We review the recent literature on mobile termination rates (MTR) in mobile communication networks (M2M). This literature shows that mobile networks may have incentives to charge ineficient high termination charges leading to reduced surplus for consumers and society, and therefore should be regulated. We discuss optimal regulation of MTRs and the two main objectives behind current regulation: excessive pricing and entry assistance. We also present a sketch of a new regulatory regime for the mobile industry.

Should mobile subscription be subsidised in mature markets?

Handset subsidies are prominent in many mobile markets, and are often justified on the basis of network externalities arising from new subscribers joining with a benefit to existing subscribers in addition to their private valuation. An associated argument is that a tax on termination to fund these subsidies is justifiable. However, the external benefits from new subscriptions are likely to be minimal in the prevailing circumstances of saturation where there is not even the prima facie basis for mounting a case for subsidies. Benefits to other than new subscribers could be captured by personalised subsidies to new subscription and reciprocities in calling arrangements. Further, high termination charges will lead to fewer calls to mobiles, reducing the value of, and willingness-to-pay for, mobile subscription. Empirical evidence that handset subsidies are increasingly concentrated on discouraging churn and on encouraging migration to 3G mobile networks—rather than attraction of first-time subscribers—suggests that mobile subscription subsidies are not targeted at internalising various forms of externality, and instead are being used as a competitive tool.

Testing the 'Waterbed' Effect in Mobile Telephony

This paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the effect. The waterbed effect has long been hypothesized as a feature of many two-sided markets and especially the mobile telephony industry. Using a uniquely constructed panel of mobile operators' prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude of this effect. Our results suggest that although regulation reduced termination rates by about 10%, this also led to a 5% increase in mobile retail prices. We also provide evidence that both competition and market saturation, and most importantly their interaction, affect the overall impact of the waterbed effect on prices.

The impact of regulation on the retail prices in fixed-line telephony across the European Union

This paper estimates reduced-form models for incumbent prices in the fixed telecommunications industry using data for European Union (EU) countries from 1998 to 2002. The regulation of fixed-line telephony has a significant impact on prices for residential consumers. Liberalization of the telecommunications industry decreased retail prices by about 8.2%. The introduction of carrier pre-selection and number portability had a negative impact on price levels. The estimation results also suggest that a 1% decrease in termination charges on the incumbent network led on average to a 0.17% decrease in the cost of usage basket for residential consumers. Furthermore, in the pricing regressions for incumbent local and national calls at peak and off-peak times interconnection charges are significant only in the estimation of national peak prices. A 1% decrease in single transit interconnection charges on the incumbent network led to a 0.31% decrease in incumbent national prices at peak times, as calculated for the average prices in the EU in 2002.

Why is on-net traffic cheaper than off-net traffic? Access markup as a collusive device

Mobile telephony networks typically overcharge each other for the termination of incoming calls, leading to high prices for off-net traffic. The existing theory claims that this behavior reduces profits since high termination charges make firms set high marginal prices, thus leading to lower subscription fees and reduced profits. This paper bridges the gap between theory and reality by incorporating several assumptions in a model that reflects the reality of mobile telephony markets. One of the key assumptions is the fact that subscribers tend to place their calls to a limited number of people consisting mostly of friends and relatives. The existence of such calling clubs, combined with switching costs, supports high access fees at the equilibrium. We also discuss the implications of our analysis for EU regulation.

Mobile termination charges: Calling Party Pays versus Receiving Party Pays

In many countries there is widespread concern at the level of mobile termination charges. This is attributable to the bottleneck monopoly created by the Calling Party Pays (CPP) principle. It has led to increasingly severe price controls on termination charges. Regulatory experience in the three foremost such countries (UK, Australia and New Zealand) suggests that price controls are of limited effectiveness in aligning termination charges with costs, that net welfare gains from controls are small and that costs of setting controls are high. The Receiving Party Pays (RPP) principle, which applies in North America and several Asian countries, avoids the bottleneck monopoly problem. After allowing for various economic and technical average revenue (price) per call is significantly lower with RPP, average minutes of usage per subscriber are significantly higher and the mobile penetration rate is not significantly different. Handset subsidies seem to be lower in the US (with RPP) than in the UK (with CPP). Surprisingly, CPP regulators have either ignored RPP or rejected it for various alleged disadvantages. These do not withstand investigation. However, in CPP countries there is still concern about the idea of paying to receive calls. There is a way to get the benefits associated with RPP without this disadvantage. RPP is based on a ‘bill and keep’ regime. Some mobile operators in RPP countries are now offering customers the option of calling plans with free incoming calls. Changing to a ‘bill and keep’ regime would avoid the bottleneck monopoly and associated distortions of conventional CPP regimes, yet enable operators and customers themselves to choose how to pay for calls—in effect, to choose between CPP and RPP.

Voice Over IP. Competition Policy and Regulation

Traditionally, there have been two separate telecommunications networks, one based on switches, the other based on routers. The switched network basically carried voice. The packet switched network basically carried data. Now voice is about to go packet switched too. Ultimately, both networks might merge. If that were to happen, the governance structure of either of these networks would have to change fundamentally. Currently, a large amount of packet switched traffic goes over the public Internet. The Internet is organised as a club good. There is an access fee, but no further fee for its actual use. Volume metering is technically feasible, but typically only bandwidth is controlled. In the switched network, a split price is standard. There is an access fee, plus a separate fee for each call. In a club good, by definition each side pays for part of the traffic. On the Internet, the receiver pays principle is thus applied. In most countries, the switched network is governed by the caller pays principle. Under that principle, there are termination charges. Each operator has a local monopoly over its customers. There is thus the possibility that telephony will in the future be controlled by the same principles. Actually, in that case the only remaining property right would be access to the network. In the opposite case, data traffic might be contaminated by the principles currently governing switched telephony. This would presuppose that operators succeed in introducing artificial property rights for the relationship with their customers, maybe even for the individual instance of communication. Technically, there are two main opportunities for this. In switched telephony, for technical reasons it is natural to give out telephone numbers to operators, not to clients. Through these numbers, they control their customers. Voice over IP operators try to implement the same scheme for packet switched voice traffic, although here the domain name system would be natural. Domains are accorded to end users, not to operators. A second conduit for artificially introducing property rights is technical standards. They are needed for defining addressees, for the management of real-time interaction, and for the digital coding of voice signals. By way of proprietary standards, the operator gains full control. Competition policy should not only see at the establishment of these fundamental governance structures. It should also check the potential for distorting systems competition between switched and packet switched telephony. Incumbents are having a host of potential strategies for creating new barriers to entry, and for distorting actual competition. Most critical are bundling strategies. Diagonally integrated incumbents might offer their clients to carry their traffic over IP where possible, and through their traditional network otherwise. That way they could turn their customer base in the traditional networks into a barrier to entry. Currently, this strategy can fully work for mobile telephony. In fixed telephony it is more difficult to implement as long as IP addressees are not earmarked.

Mobile Termination: What is the “Right” Charge?*

The regulation of fixed-to-mobile (F2M) termination charges has become increasingly important in Europe, Australia, and New Zealand under the Calling Party Pays principle. In the absence of any regulation, mobile operators have an incentive to set F2M termination charges “too high”. We show that the setting of the optimal F2M termination charges depends on the significance of network externalities, the intensity of competition in the mobile sector, and the distribution of customer preferences. We also discuss the merits of possible remedies which are not very intrusive.

Network interconnection with asymmetric networks and heterogeneous calling patterns

The paper analyzes network interconnection when subscribers are heterogeneous in their demand for calls. In the two-way interconnection case, an increase in the difference between termination charges affects the average intensity of competition, while an increase in the average termination charge affects the relative intensity of competition for the high and low volume subscribers. If the incumbent is regulated so that it just breaks even, then a reciprocal termination charge is optimal. This reciprocal charge is above the incumbent's cost of access whenever its retail tariff involves subsidizing low volume users.

Pricing access to Internet service providers

This paper studies the efficient pricing of termination services for calls that are made to Internet service providers (ISPs). A model is presented in which an incumbent phone network is obligated to provide local calls at a regulated per-minute price while entrant carriers compete to terminate ISP-bound calls. This model is used to understand the problems of regulatory arbitrage that arise when termination charges for ISP-bound calls are not regulated or set reciprocally. Different solutions to the pricing of terminating ISP-bound calls are evaluated.

Mobile Number Portability

This paper examines the consequences of introducing mobile number portability (MNP). We show that if the sole effect of introducing MNP is the abolishment of switching costs, MNP unambiguously benefits mobile customers. However, if MNP also causes consumer ignorance, as telephone numbers no longer identify networks, mobile operators will increase termination charges, with ambiguous net effect on the surplus of mobile customers. We examine how extensions such as MNP based on call-forwarding, termination fee regulation, and alternative means of carrier identification affect these findings and discuss policy implications.

Investments and Network Competition

This paper analyzes the incentives that network operators have to invest in facilities with different levels of quality. We extend the framework of Armstrong-Laffont-Rey-Tirole by introducing an investment stage, prior to price competition, and we study the dynamic aspects of two-way access charge regulation. When the quality of a network has an impact on all calls initiated by own customers (destined both on-net and off-net), we obtain a result of tacit collusion even in a symmetric model with two-part pricing. Firms tend to under-invest in quality, and this would be exacerbated if they can negotiate reciprocal termination charges above cost. On the contrary, below-cost access charges would improve social welfare. We also show that when the quality of off-net calls depends on the interaction between the quality of the two networks, there is another serious problem, namely that no network has an incentive to jump ahead of its rival by investing more.

Access Pricing under Competition: An Application to Cellular Networks

A new class of access pricing problems is analyzed in which upstream firms compete for customers and access to these customers is required by downstream markets. Using fixed–to–cellular calls as an example, a model is presented which shows that the determination of cellular termination charges is quite different to standard access pricing problems. Competition between cellular firms leads to access prices being set either at, or above, the monopoly level. Applications are given for other market settings, including the termination of long–distance calls on competing local exchange networks and the setting of interchange fees in payment systems.

Regulating Termination Charges for Telecommunications Networks

This paper considers the effects of regulating termination for interconnected, but otherwise unregulated, telecommunications networks. We develop two models, the first that involves fixed market shares and the second, based on the work of Laffont, Rey and Tirole (1998a), which allows for subscriber competition. We show that if a dominant network (i.e. one with the greatest market share) has its termination charges regulated then this will tend to lower the average price of calls. It is also likely to lead to other networks raising their termination charges. If market shares are fixed, then extending termination regulation to non-dominant networks lowers call prices and is unambiguously welfare improving. However, if networks actively compete for subscribers then extending termination charge regulation to a non-dominant network may lead to higher call prices. This is most likely if the non-dominant network has a very low market share relative to the dominant network.